The Diffusion of the Sandbox Approach to Disruptive Innovation and Its Limitations

Faced with the challenges posed by the rise and evolution of disruptive technologies and innovations, countries have adopted differing regulatory approaches and adapted institutional structures and norms to maximize benefits while mitigating risks. Among such regulatory endeavors, the ‘regulatory sandbox’—in the Fintech area in particular—has emerged as a promising tool to strike a balance between promoting technological innovation and ensuring market order in the aftermath of the Global Financial Crisis (GFC). First adopted by the UK’s Financial Conduct Authority, the regulatory sandbox approach is designed to encourage innovation and competition in the financial sector by relieving qualified market participants from regulatory burdens under certain conditions. The regulatory sandbox approach enables the regulators to minimize the risks associated with Fintech activities in a controlled environment. Given the promises of the regulatory sandbox, there has been a gradual embrace of this approach by governments across continents, including those in Australia, Canada, Hong Kong, Singapore, and Taiwan. Such global norm diffusion evidences the emergence of the sandbox approach as a default option for regulators to cope with challenges posed by disruptive technologies and innovations. The question, however, is: how far can this approach go? Are there any concerns or limitations?

To date, the geographic diffusion of the sandbox approach has also been accelerated by a trans-governmental endeavor that aims to facilitate cooperation among regulators and convergence in regulation through multilateral forums and bilateral arrangements. The sandbox approach has also gone beyond the financial sector and touched upon various other regulatory areas, given the cross-border nature and implications of many disruptive technologies and innovations. As we discuss in our recent paper, Canada, Japan, Singapore, and Taiwan recently applied the sandbox approach to energy, environmental, healthcare, and transportation issues. All these developments evidence the rise of the sandbox approach to regulating disruptive technologies and innovations in different sectors at the national, trans-governmental, and global levels, which has crucial theoretical and practical implications.

However, there are formidable limitations to the rise of the sandbox approach. An in-depth and thorough analysis of Taiwan’s aggressive use of sandbox regulation in the areas of financial services, unmanned vehicles, and more recently, artificial intelligence shows that the Taiwan legislature can be seen as conducting a massive legal transplant or regulatory borrowing to save costs and secure legitimacy. Yet, how far can such legislative strategy go? We argue that while the sandbox approach and its global diffusion have emerged as a handy tool for governments to manage the ramifications across different sectors, there are limitations that may affect how countries implement these regulatory approaches on the ground. Specifically, the rise of various disruptive technologies and innovations has increased public demand for regulatory actions, and the Taiwan legislature has a strong incentive to secure its legitimacy by looking to foreign and international ‘success stories’. The regulatory sandboxes in financial sectors established by the UK, Australia, and Singapore readily offer such appealing models. By mimicking the regulatory designs adopted by countries with common law traditions, whose legal systems and rules usually enjoy assumed (perceived) efficacy and superiority, the legislators faced with regulatory challenges or dilemmas do not have to convince their constituencies that the borrowed approach will work. Nevertheless, as our analysis on the Fintech sandbox indicates in the Taiwanese context, such perceived efficacy might not apply without encountering hurdles, in particular when the established legal and commercial practices, institutional arrangements, and relationships in the local setting may translate into regulatory capture, regulatory inertia, and path dependence that further impede the effective implementation of transplanted regulatory sandboxes. In any event, disruptive technologies or innovations do not always translate into a necessity for regulators to ‘re-invent the regulatory wheel’, and even if they do, the level of necessity and of reinvention may be perceived differently by a diverse range of stakeholders. These problems might render a country’s regulatory strategy and rule of law unstable and plagued by uncertainty, inapplicability, and under-implementation. In a heavily regulated area such as the financial sector, there may be more regulatory inertia, institutional stubbornness, and a risk-averse tendency in decision-making, preventing the competent authorities from living up to the mandates and implementation measures—as we have seen in the case of Taiwan.

In all, as argued in the paper, the legal origin, regulatory culture and domestic political economy in the post-GFC era play a crucial role in shaping path dependence and institutional inertia nested within regulatory agencies, which may undermine the effective implementation of the sandbox approach. One must not take the sandbox approach at face value—it is those complicated local contexts, seen or embedded, that will define the ultimate contour of the global sandbox approach in the long run.

Chang-hsien Tsai is Professor of Law and Business at National Tsing Hua University, Taiwan.

Ching-Fu Lin is Associate Professor of Law at National Tsing Hua University, Taiwan. 

Han-Wei Liu is a Lecturer at Monash University, Australia.